Financial inclusion in Latin America: The scenario and opportunities for fintechs

Latin America showed the largest growth in the number of people having bank accounts between 2017 and 2021, according to the study Global Findex 2021, conducted by the World Bank. However, opportunities for a more widespread use of digital payments persist. After all, 150 million adults having bank accounts made payments solely in cash at commercial establishments, including over 50 million on them in Brazil and 16 million in Colombia.

To comment on this scenario and, mainly, the performance of fintechs in the context of Financial inclusion in Latin America, we spoke with Bruno Diniz, specialist in innovation in the financial market, co-founder of Spiralem, South America Director at FDATA (Financial Data & Technology Association), professor at Fundação Dom Cabral and MBA at USP and author of the book “The Fintech Phenomenon”.

The role fintechs play in financial inclusion is a common topic in the industry today. But how can we effectively contextualize that role?

Fintechs have had a critical role in the entire process for driving advances in the financial industry, not only in Brazil but also across Latin America and other regions.

Considering the reality in Brazil, alternatives were limited when it came to managing one’ financial life 10 years ago. And those have grown since the regulator paved the way for fintechs. That process is also ongoing in different countries in Latin America, which are working on their own regulatory foundation to accommodate new business models.

We’ve started having new industry actors, which are able to better understand specific types of audiences that traditional banks often don’t see. Possibilities are now available for different groups to access financial services. So without a doubt, the fintech phenomenon we’ve seen in the past few years has revolutionized the way financial services are delivered and accessed by people in general.

How does this fintech phenomenon has progressed in Latin America? What countries are advancing more or less quickly in that direction?

It’s important to stress that regulation is crucial for that advance. However, there are several countries where a system is developed according to existing devices in terms of regulatory foundation.

Among the countries we’ve observed in Latin America, Brazil  it is the most advanced one. Mexico has made progress when creating the law for fintechs, although we’ve been informed that things are not going as smoothly as we imagined. Colombia has attracted foreign capital as they regulate different elements in a digital economy. Uruguai and Peru has also made important progress.

O Chile recently approved a regulation that is a little clearer about several blind spots within their financial market, in addition to advancing on the part of the Open Finance, a very important structure in developed economies around the world.

Argentina has seen macroeconomic and conjectural issues. And when you have such an intense issue, it’s more difficult for a regulator to pay proper attention to other elements. Also due to an economic issue, Bolivia and Venezuela are falling behind in the process as a whole.

What are the challenges in expanding that role fintechs play in Latin American financial inclusion in terms of product innovation, number of users and other variables?

I’ll mention again the regulatory process as a big challenge. That makes all the difference so that the rules of the game are clear. Once they are, it is easier for those working locally to employ them and for those investing to put their money on the line—so it basically makes it easier for the ecosystem to develop.

In some countries, we also have challenges involving the move from a more basic structure to a digital one—such as the network coverage for smartphones—which are elements that can bottleneck the process.

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Another challenge we’re experiencing now involves the global economical issue and the decrease in attracted investments: resources targeted to the segment have decreased, and many countries have seen a huge decrease in valuation. That’s a real test for some business models that had a longer maturation horizon and now will have to answer their investor more quickly.

We’ve recently started adjusting that route, but the past few years have been euphoric. Latin America got in the map for investors, and there’s much to be done here. Entrepreneurs have a lot on their plate.

Embedded Finance can be a model less vulnerable to investors’ appetite for evolving financial inclusion in Latin America?

O Embedded Finance <span style="color:#fff">now</span> comes in the picture as an interesting possibility, a natural growth for possibilities created by fintechs. In some cases, a crisis context can shelve projects. We’ve seen major Retailerschain, for instance, planning to release a financial service unit and taking a step back due to the current economic scenario.

Today, we can more clearly demonstrate the advantages in Embedded Finance: there’s increased urgency for major conglomerates to embark in the world of embedded finance.

In this context, we also have the providers of Banking as a Service that take advantage of this market timing and end up alleviating this more acute crisis in the fintech sector. This is because they are providing for companies that do not need an investment to offer financial services, they just need to know if it is the ideal time or not.

When adopted by major retailers, can Embedded Finance also be a way out for infrastructure challenges?

We need to understand the context we’re in. Mexico, for instance, has an instant payment system, CoDI, but that didn't catch like the Pix got it here in Brazil. So there we saw, a very popular chain of convenience stores, offering financial products digital and grow absurdly.

Thus, in countries that have deficiencies in terms of infrastructure, as in the case of instant payments, retailers play a very important role in using embedded finance. As there is already a formed network, the stores become a fundamental point of cash in/cash out, since the population depends a lot on cash.

That’s what happens in Brazil for Bemol, a retailer operating in the Amazon region. Although Brazil has Pix working nationwide, we need to consider specific cases in the country.

You mentioned that entrepreneurs have a lot on their plate in Latin America. What are the opportunities in the horizon for financial inclusion?

This proves that there is still a lot to be done in terms of basic financial inclusion. But there are also other steps, which are access to credit, microcredit, ease of contracting services such as insurance and so on. There is even the challenge of financial education content basic, which translates into a very great opportunity for those who come to do business here.

It is a scenario that is different from more developed countries, such as the United States, where competition is fierce and people are more informed on the basic concepts governing a financial life. It all means more opportunities.

Read also | Credit industry in Latin America: 4 opportunities for driving the industry

The product and service range for fintechs is enormous. How do you see this expanded service range? What is interesting in new trends?

In the past, it used to be easier to pick elements from the traditional financial industry and reimagine them in a fintech version. We’ve come up with alternative investments, loans, insurance plans, and so on so forth. I believe that we’ve now reached a moment in the industry where we pay more attention to infrastructure.

Banking as a Service is a consequence of that, and there’s no parallel to it. It is a new service, which has already existed in different formats for a while, but it is done now in a brand new way.

It is a model that has known very well to bring together current regulatory and technological aspects to deliver solutions, but which will soon have to gather new elements – perhaps based on what is being brought by the cryptoeconomy and Web3  – to make even more modern service delivery.

Specifically regarding financial inclusion, what initiatives would you like to highlight in terms of access to different audiences?

Born in a favela in Rio de Janeiro, Banco Maré is an interesting initiative in Brazil. It is an example of filling in the gap for the residents of those communities who have specific needs and aspects and don’t have access to financial services.

There’s also PicPay, which made agreements with the Sao Paulo State Government during the pandemic for distributing financial aid. This fintech initially focused more on a young audience than on inclusion, but in the end it’s become quite connected to classes C, D and E.

When it comes to Embedded Finance, we have a project for including the community of alumni waste pickers, which Dock itself has enabled. And another example I’d like to bring up is banQi, by Via Varejo group, which is a major retailer targeting the masses.

How does retail contribute to financial inclusion in Latin America and transforms customer experience at stores? Learn about the VUON case: 

And what is your advice for fintechs on a mission to contribute to financial inclusion in Latin America?

My understanding is that is takes a lot of clarity on the audience you’re targeting—also because there are a lot of marginalized groups in terms of access to financial services. It is necessary to understand who that audience is. The more specific the fintech is at that initial stage, the better they can deliver something that makes sense.

Furthermore, in times of Embedded Finance, a digital account it's something you find everywhere. So it's also about how you deliver the experience of this product, whether because the user has a lesser understanding of the mechanics of the financial market or difficulties with text interpretation. It is necessary to create ways for the person to really understand that that product makes sense.

It's like in the case of conscious credit. For a person who has difficulty understanding the financial market, the credit card products it's a razor. You have to work on the binomial access and financial education in relation to the product offered.

Read also | Niche fintechs: The future of finances is built through inclusion and innovation

Financial inclusion in Latin America: Takeaways from this article

• Fintechs have had a critical role in the entire process for driving advances in the financial industry, not only in Brazil but also across Latin America, making possibilities available so that different groups can access financial services.
• The regulatory foundation is critical for countries to advance in financial inclusion by counting on fintechs. Also, some countries face challenges involving the move from a more basic structure to a digital one.
• Embedded Finance can be an option in a less vulnerable format for fintechs facing a challenge when it comes to attracting investments.
• When adopted by major retailers, embedded finance can also solve eventual infrastructure issues.
• There are a lot of opportunities for fintechs that are on a mission to contribute to financial inclusion in Latin America, and learning about their target audience is key to offer a product that makes sense.

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